The Swiss at war? When was the last time that happened?
It’s been a long, long time — 1803, to be precise — since the Alpine nation engaged in an all-out, unlimited conflict. That was when Napoleon Bonaparte, soon-to-be Emperor of France, agreed to end his military occupation of Switzerland and respect Swiss autonomy so that he could focus his attacks on Austria and Russia.
During the early to mid 1800s, the Swiss did engage in a number of internal civil wars, until the cantons united under their first federal constitution in 1848. There were no Swiss declarations of war of any kind since that time; the nation even managed to remain completely neutral throughout the two world wars of the twentieth century.
Until last week, that is, when the Swiss National Bank publicly declared an “unlimited war” on the rest of Europe. And oddly enough, the first European nation compelled to respond was Norway.
Defend The Currency!
What would drive the Swiss to such a declaration? It is the continuing collapse of the value of the euro against the Swiss franc that led the Bank last week to assert that “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy (which it) will no longer tolerate.” The Bank then drew a line in the sand at an exchange rate of 1.20 francs to the euro, and swore to “enforce this minimum rate with the utmost determination (by buying) foreign currency in unlimited quantities …”
Unlimited buying of currency? That means war! Especially in a nation known for its global banking industry.
The underlying source of all this brouhaha is the European Union’s banking crisis, which threatens to topple the EU’s economy if the fiscal collapse of its weakest members (the proverbial PIGS, i.e. Portugal, Italy, Greece, and Spain) leads to the bankruptcies of the EU’s largest banks. Many believe that the collapse of “too big to fail” EU banks like BNP Paribas, Credit Agricole, and Societe Generale will drop the EU (and perhaps the United States and Japan as well) into a dreaded double dip recession.
This concern has compelled currency speculators to pull their capital out of EU and American asset markets — including the currency markets — and to buy up the assets of fiscally conservative markets. Switzerland, being the quintessential example of a conservative fiscal market, has thus witnessed a massive increase in demand for its currency, which in turn has driven up its value around the world.
Pros and Cons
There are, of course, some very real benefits to maintaining a strengthening currency. Swiss citizens who travel abroad, or who buy goods that are manufactured in other nations, can effectively purchase more for their money. And Swiss manufacturers that outsource functions to firms in other countries, or that purchase supplies and components from suppliers in those countries, can spend fewer Swiss francs when converting its funds to other currencies.
On the other hand, Swiss exporters inevitably find that they must greatly increase their sales prices when selling to foreign customers in their home currencies. In other words, when Nestle sells chocolate in Paris, and when Rolex sells wrist watches on the French Riviera, they must increase their euro prices significantly in order to receive the same amount of Swiss francs when they convert their sales revenue from euros into francs. That gives competitive firms like Godiva and Cartier a huge advantage because, when they sell to EU customers, they simply collect sales revenue in their own home currencies and need not worry about conversion losses at all.
Some nations do not rely heavily on export industries, and thus are not terribly inconvenienced by soaring currency values. But Switzerland, as a relatively small nation with many prestigious, luxury product exporters, finds itself disproportionately affected by such conditions.
Norway Responds … and Japan Does Too!
Ironically, the first nation that appeared to be affected by the Swiss declaration of war on the euro was not an EU nation. It was Norway, another small, independent, and fiscally conservative European nation outside of the EU, that became the center of attention when currency traders began searching for alternatives to the Swiss franc.
Unlike the Swiss National Bank, though, the Norwegians declared that they had no desire whatsoever to intervene in the currency markets in support of their home currency, the krone. And Japan — another export oriented nation with a soaring currency — did likewise, asserting that it “should not compete with other countries to weaken its currency.”
As long as other nations back away from the fray, Switzerland’s war is not likely to grow into a worldwide currency conflict. In the high stakes battle for global economic supremacy, though, hedge funds and other speculators will likely continue to find profitable transaction opportunities in the volatile currency trading markets for quite some time to come.